Not Every Small Business Deserves to Survive, and That’s a Good Thing
If you haven’t heard it by now, small businesses are the backbone of the American economy. Something like 90% of jobs are attributable to small businesses. Of course, that statistic includes businesses with up to 500 employees which I personally don’t consider small. Still, these businesses in this range make up the bulk of not only employers in the country but also the bulk of service industries. Hairdressers, restaurants, plumbers, and any number of local services you might need. Most of these businesses, even if a franchise of a national chain, qualify as small businesses. Small businesses are hard they require a lot of work but more important than hard work they have to have a good profitable business model. Unfortunately, many small businesses don’t have this. Those that don’t, probably really should be closed. To illustrate this let me tell you a story.
This is a tale of two small independent community movie theaters. One of them has been a local institution for decades and will probably survive this the other probably doesn’t deserve to survive. I’ll name names, these two theaters are the Chalet Theater in Enumclaw Washington and the Ark Lodge Cinema in the Columbia City neighborhood of Seattle. These two theaters provide a perfect contrast between a business that has adapted and grown a workable business model and one that has not.
First, let me be clear, I would be very happy if both these theaters survived. I am a frequent patron of both of these theaters. I would love to see them both continue to exist and thrive long into the future. Both of these theaters are cornerstones in their communities and have wonderful atmospheres that you just cannot get in a multiplex.
I have been going to the Chalet Theater for well over a decade. Ever since we found it, my family and I loved going to this theater, it was often our theater of choice for any new release. Even today when my son comes to visit me he requests to go see movies here although I now live about an hour away. I even make it a point to go see a movie here about once a month, scheduling my hair appointments with my hairdresser in Enumclaw around what movies are showing. The last movie I saw here was Onward, which I saw with my son and his girlfriend just before the pandemic hit.
I have been going to Ark Lodge Cinema now for about 4 years, ever since I moved to downtown Seattle. Its location is convenient and it is a different experience from a standard AMC or Regal. It’s the easiest theater for me to get to if I don’t want to take public transportation or pay for parking. While I will often prefer to go to fabulous Seattle Cinerama for big blockbuster films. Ark Lodge is the perfect place to watch smaller movies. The last movie saw here was Parasite, which also was with my son and his girlfriend the week before the pandemic really started to take off.
There are several fundamental differences between these two theaters. Chalet Theater is a converted American Legion hall, it has only one screen and seats over 350 people. Ark Lodge is a converted Masonic Lodge it has 3 screens the largest of which can seat 200 people. The big difference that will determine if they survive, is in how the businesses are run, the communities they exist in and the financial footings the owners have under them.
Chalet Theater is the only theater in a small rural town of over 11,000 people. The nearest multiplex theaters are about 30 minutes away. Ark Lodge, on the other hand, is in south Seattle. The neighborhood of Columbia City also has a population of over 11,000 people and the city of Seattle a population of over 660,000 people. You can drive less than 15 minutes north or south from Ark Lodge and have your choice of numerous multiplex theaters, AMC or Regal, as well as other independents in either downtown Seattle or Renton. So while the population of their core communities is about the same, Ark Lodge as access to a much larger total population however Ark Lodge has competition. The Chalet Theater has the advantage of isolation. Until AMC or Regal decides to open a theater in one of the nearby communities such as Covington or Maple Valley this advantage will remain. In business class, this would be taught as an example of exploiting a geographic niche. The current pandemic actually serves to strengthen this niche. AMC one of the chains that could potentially threaten this niche market is facing economic stress because of the current situation. This stress will certainly put off any future expansion that might have threatened this niche market for Chalet Theater. Ark Lodge, however, will remain in much the same situation as it is, surrounded by many competitors.
In addition to the local market, both theaters also have very different financial footings. Now I really only know a little about this for each and much of this will be conjecture but it is enough to make a broad assumption about their ability to weather this storm. First, the owners of the Chalet Theater own the building that theater is in. As family, they inherited it from the previous owner, Ken Kerr when he passed away in 2012. From this, it is reasonable to deduce that the current business has little if any debt. Any debt they may have is only due to the extensive improvements they have made in the last 8 years. Most importantly they do not have rent payments. The Ark Lodge Cinema, by contrast, has very high rent payments. The owners of the theater do not own the building and as with all real estate in Seattle, their rent is probably pretty high. I do no know what the rent on the building is however for the square footage in the location they are in their rent payment cannot be less than $5,000 a month and that is being extremely generous. It is easily conceivable that their rent is over $10,000 a month.
These two factors that revolve entirely around the location are mostly out of the control of the owners. A business is where it is and pays the rent that it must exist there. Theaters are not businesses that can be easily moved to any square box in a strip mall. What is however under the control of the owners is the business model they run under.
Prior to 2012, the Chalet Theater was nice but a little run down. Ken was older an not able to really maintain or grow the business. Everything still worked but, as an example, he only ever took cash. He never took credit cards as payments. Yes, in 2010 we always had to remember to take cash for tickets and concessions. By 2013 his family had taken over and started making changes. The first noticeable one was that they started accepting credit cards. They made further improvements including a new sound system, digital projection, expanded concession menu, including alcohol, and cosmetic improvements to the building. It was still the same place but just better. They then proceeded to explore other sources of revenue not just movies. They added a stage and stage lighting and started hosting live events. They hosted concerts, comedians, and children's shows such as Casper Babypants. They even added live Seahawks games. While they couldn’t charge admission to watch the football games these were very popular and they make good money off concession sales.
Ark Lodge, well, it’s just a movie theater. You can go there to see movies. They usually have three or four movies that they are showing but you can usually go see the same three or four somewhere else. With more than 3 screens you can probably go see it at the time you want to see it. They also sometimes don’t have the biggest movies. Theaters have to pay for distribution rights and a part of that is based on ticket sales, a part is flat fee that must be made up front. This is a gamble. Studios know this and if the movie is going to be a hit the fee can be much more than a small theater can risk. Also with 3 screens, Ark Lodge has to take this risk on 3 times as much.
All this comes to one point, while both theaters are nice theaters to go to, only one is a viable business. Last year I remember seeing a notice asking people to come to visit the Ark Lodge because they were having problems paying their rent. Now, this was last year. This was when the economy was doing great. How can a business that is struggling during good times hope to survive an economic downturn of any kind much less the current catastrophe? The answer is that it probably won’t and we should be okay with that.
When a bad business fails and goes away it leaves room for other businesses to take its place. This current wave of economic turmoil is like a great forest fire. It is destructive and will burn many green things to the ground. However, after the forest fire, things will be more green than they were before. Light will reach the forest floor and new things will grow. The dollars that consumers would have spent at mismanaged businesses that shouldn’t exist will be spent at new businesses that might not have been able to grow under the shadow of these older businesses. These new businesses will hire employees and grow and in the end will be a much more stable part of their economic communities than the business that failed.
If Ark Lodge does close I will be sad. But we shouldn’t try to rescue every community business. I’ve recently seen people promoting buying gift cards to restaurants as a way to help them bridge the gap until things improve. While that might help with current cash flow, buying a gift card to a restaurant adds debt to their books. What happens IF they reopen and all those people who bought gift cards decide to all use them. You’ve just moved the cash flow crunch down the line, you haven’t fixed the problem. So, if you are going to buy gift cards to support your local business, I suggest not planning on using them for at least 8 to 12 months after the business as reopened.
But really I suggest not doing this at all. I have $200 in gift cards to Tom Douglas restaurants that I received last year. All his restaurants are now closed and may not reopen. So I might never be able to use these. So my advice, keep your cash now. Then when this is over support the businesses that manage to survive when they reopen. You will be sad enough if your favorite restaurant never reopens. Don’t also be mad that you wasted money and are left with worthless gift cards.
